What is a Director Penalty Notice?
As a director, one of the most important notices you need to look for is a Directors Penalty Notice which is issued by the Australian Taxation Office under the Tax Act.
If you get a Directors Penalty Notice YOU MUST ACT IMMEDIATELY TO AVOID PERSONAL LIABILITY. If you do nothing you will automatically become personally liable for the company’s tax debt.
If you absorb only one bit of information from this website this is the one to understand!!!!! Please CALL US so we can advise you how to avoid personal liability.
What is a Director Penalty Notice?
The ATO has the power to collect outstanding payments, being amounts deducted under the PAYG provisions or unpaid Superannuation, by making directors liable for a ‘penalty’ for the same amount as the unpaid amounts. These provisions create a liability to the ATO in the name of the director. Each director of a company becomes separately liable for the full amount of the penalty.
There are two types of Director Penalty Notice, the 21 Day Director Penalty Notice and the more severe “Lockdown” notice. The determining factor in which type of notice they send is the timeliness and accuracy of the company’s reporting of the debt (not payment). If the debt was reported on time (by submitting a BAS for PAYG or Superannuation Guarantee Charge Statement for Super) or less than 3 months late they can only use the 21 Day Director Penalty Notice. If the debt is unreported or was reported more than 3 months after the due reporting date, they can hold the director immediately personally liable with a Lockdown Director Penalty Notice.
21 Day Director Penalty Notice
If a Director receives a 21 Day Director Penalty Notice it requires the directors to take action within 21 days of issue or the director will be personally liable for the debt. That is, the company’s debt to the Australian Taxation Office will become a personal debt of the directors.
The actions a director can take to avoid liability are:
- Pay the debt in full;
- Enter into an instalment arrangement to repay the debt;
- Appoint a Voluntary Administrator; or
- Appoint a Liquidator.
The 21 days is a strict time limit. The ATO has no discretion to extend the period.
Lockdown Director Penalty Notice
A Lockdown Director Penalty Notice informs the director that unless they cause the company to pay the outstanding debt in full by the end of the 21 day notice period, they will be held personally liable. There are no other provisions to escape personal liability,putting the company into Liquidation or Administration will not help. In fact, it is uncommon but the ATO can issue a Lockdown even after the company has entered liquidation.
Director Penalty Notices do not have to be served in the same way as legal proceedings. The ATO only needs to give notice and this can be done “by leaving it at, or sending it by post to, an address that appears from [ASIC or ATO] documents to be, or to have been within the last 7 days, the person’s place of residence or business”.
Directors and their advisors need to ensure that address details are up to date, or the notice may be issued and expire without the director even being aware of it.
The 4 choices on the 21 Day Notice are actually more limited than they appear. An instalment agreement may take longer than 21 days to negotiate and execute. Directors may not even be aware that this option exists until they receive the notice and then may not understand what it means. Further, there is no certainty that the ATO will accept any proposal made by the company.
What should you do?
Act immediately! If the company is solvent, it should pay the tax. Directors of companies that cannot pay the tax usually decide to appoint a liquidator, by way of Creditors Voluntary Liquidation, or a Voluntary Administration. Either can be done quite quickly, even in one day if need be.
As this is a potential minefield for directors we strongly recommend you CALL US immediately.